UK Property Market Rebalances as Affordability Improves

House prices in the UK rose 0.3% in January 2026, recovering from an unexpected 0.4% fall in December. The average UK home now costs £270,873, marking a 1% increase year-on-year. But the more significant shift is happening beneath the headline figure: affordability is improving, first-time buyers are returning to the market, and rental demand has fallen to its lowest level in seven years.

What's Driving the Shift

The main driver is relative affordability. House prices for first-time buyers relative to earnings dropped below their long-term average at the end of 2025, reversing years of deteriorating affordability that had pushed an entire cohort of would-be buyers into long-term renting.

A first-time buyer with an average UK income and a 20% deposit now spends 32% of their take-home pay on monthly mortgage payments. That's slightly above the long-term average of 30%, but well below the 2023 peak of 38%. Crucially, wages are rising faster than house prices as earnings grew 4.7% in the three months to November, while house prices rose just 1% year-on-year.

Bank of England data shows about 27.4% of loan value went to first-time buyers in the third quarter of last year. That's almost double the 2007–2019 average of 15%, representing a structural shift in who can access home-ownership.

Another driver is net migration. Immigration fell 69% to 204,000 in the year ending June 2025. Rental properties are typically the first option for new arrivals, so this decline has reduced competition among tenants. Estate agents received an average of 5.8 enquiries per rental listing in January—the lowest figure for the start of the year since 2019. Overall rental enquiries were down 20% compared to January 2025.

The Rental Market Response

Weaker demand has shifted pricing power. Rent inflation slowed to 4% in December, the lowest reading since spring 2022 and below the pace of wage growth. The numbers represent a cooling from sustained double-digit growth over the previous two years, when rental competition was intense and supply constrained.

Yet, supply remains limited. The incoming Renters' Rights Act—which ends "no-fault" evictions and restricts landlords to one rent increase per year—is prompting some landlords to exit the market before the legislation takes effect on May 1. The Royal Institution of Chartered Surveyors reported “new landlord instructions” at minus 39 in December, meaning far more landlords were withdrawing properties than bringing new ones to market. December marked the fifth consecutive month in which the measure fell below minus 30, an unprecedented run in the survey’s history.

What Happens Next

Mortgage rates are the key variable. Nationwide and other lenders announced increases this week as financial markets reassessed expectations for interest rate cuts. These are small increases for now, but they threaten to slow momentum if they continue.

The Bank of England's Monetary Policy Committee held its key rate at 3.75% when it met this week. Further rate cuts remain possible in early 2026, but the pace is likely to be gradual, creating a window of improved affordability without dramatic shifts in borrowing costs.

Forecasts from Nationwide suggest house prices will rise 2–4% during 2026, a pace consistent with improving affordability offset by higher borrowing costs and ongoing economic uncertainty.

Why This Matters for Investors

The UK property market is experiencing a rebalancing that favours owner-occupation over renting. First-time buyers are returning, rental demand is easing, and the gap between buying and renting costs is narrowing. The current market economics have implications for both residential landlords and property investors.

For buy-to-let investors, the combination of weaker demand, regulatory change, and falling rent inflation reduces the appeal of new acquisitions. Yields remain positive, but capital growth is likely to be modest.

For investors focused on owner-occupied properties or developments targeting first-time buyers, the outlook is more constructive. Improved affordability, higher mortgage approvals, and stabilising prices create a more predictable environment for long-term returns.

At PariVest, we track these dynamics because they affect timing and tenant demand. Understanding the rebalancing between rental and purchase markets allows investors to position portfolios for stability.